‘Watch the snags when property buying off plan’

Buying a house off plan will involve a lot more money issues than a pre-owned property and it is good to be aware of all the steps.

This is the word from Berry Everitt, CEO of the Chas Everitt International property group.

He says the first issue is the matter of the deposit.

It is important that you do not pay a deposit for a stand or an off-plan house – or sign any agreement to purchase such a house – until you have checked the credentials of the developer and/or home builder.

Ensure they are established operators with a track record of completed, successful developments.

“Also make sure that your deposit is paid only into the trust |account of an attorney or a registered estate agent, not the bank |account of the developer or builder.

“There have been far too many cases in recent years of bogus estate agents, builders’ agents and construction companies taking |deposits for proposed developments and simply vanishing.”

Everitt says the second thing to consider is the possibility that you might need two separate home loans, one to pay for a stand and the other for the structure, if the development is not sectional title.

“The second loan is often called a ‘building loan’ and is used to pay the building contractor in instalments, known as draw-downs.

“These are paid as certain stages of the building work are completed to the satisfaction of the financial institution.

“But you as the buyer will have to sign each draw form authorising the bank to pay; so you can have a large measure of control over the way the work is done.

“You should exercise this control by visiting the building site frequently and monitoring the workmanship closely so that any problems can be rectified immediately – certainly before the builder collects the last amount.”

Everitt says you should never occupy or sign for the keys to your new home before you have checked it thoroughly and got the builder to agree in writing to rectify any |remaining “snags”.

“Lastly, if you’re a VAT vendor or buying the property in the name of a VAT-registered enterprise, consult your accountant about reclaiming the VAT payable on the purchase of a newly built home.”

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The year-end holidays are drawing closer and more and more people are looking forward to enjoying some sun, sea and surf. There is no doubt, however, that while they are enjoying their end-of-year break, many will be tempted to buy a holiday home or apartment.

Although the temptation is big it is not a decision to be entered into lightly as investing in property is a long term commitment, warns Adrian Goslett, CEO of RE/MAX of Southern Africa.

“When investing in a leisure property it is important to make sure you are purchasing with your head and not just your heart.”

Before you decide to purchase a property you should know the detailed answers to the following questions – why are you buying the real estate in the first place and to what end? In other words, what end result does that property need to produce for you in the long run and is this a realistic expectation?

In order to answer these questions you need to do a bit of homework, says Goslett. He offers the following points that should be considered before any potential investor makes up their mind:

1. Purchase in a prime location

When selecting holiday investment properties it is best to choose a prime location, preferably with beach or mountain views.

Capital growth is usually strongest in areas that boast a well-established economic base and good infrastructure. The area should also offer a host of high quality lifestyle amenities such as restaurants, cafes, bars, shopping centres and tourist hotspots.

2. Looking to the future

It is important to understand that there are a number of factors that can impinge on the capital growth of your leisure property. Before signing on the dotted line, do your homework and check to see if there are any nearby developments planned as they can negatively affect the value and the rental yield of your property.

Also, if your property has a view, make sure that it is there to stay and nothing can be built to hinder it.

3. Understanding holiday rentals

Generally speaking, the average period of strong demand for holiday rentals is approximately eight to 10 weeks a year. Demand usually drops considerably in winter, but it tends to remain more consistent in warmer locations where holiday-makers can escape the cold winter months.

Rental returns fluctuate widely for holiday homes, depending on the location and the season.  However, proximity to the beach and a sea or mountain view makes a big difference to what rental you can ask. If the property you want to buy is a fair distance to the beach, you should possibly consider a permanent tenant rather than holiday letting.

4. The property should be self-contained

Even though smaller holiday homes may yield a higher rental return on purchase price, it is always better to choose a self-contained apartment with larger rooms and a separate kitchen, laundry, bathroom and bedrooms.

A property such as this will definitely boast a better capital growth and once the property is paid up it could be an option to use it as a retirement base in your later years.

This kind of accommodation is also more suitable for family-rentals and thus easier to rent out.

Also, as with any investment, your focus should be on well-constructed, low maintenance properties.

5. Sectional title matters  

When it comes to sectional title units it is essential to check the financials and management track record of the body corporate.

If you are investing in a sectional title unit you will become liable for any debts that the body corporate may have incurred and as such it is important to check that everything is as it should be before you sign on the dotted line.

With regards to the maintenance of the common areas of the complex – this will often make the difference between an empty and occupied apartment unit, so do a bit of research into how these areas are maintained throughout the year.

6. Outsourcing help

Since you won’t be living in the property you will need to outsource various professionals to help you maintain it such as leasing agents as well as garden, security and cleaning services.

Make sure you understand what these costs will be.  The old adage of “you get what you pay for” is, as always, true for these services and it is essential that you choose a reputable company that has experience dealing with these types of properties and one that understands the highly competitive nature of the holiday accommodation market.

7. Do your numbers

Investing in a holiday home can be a costly exercise and it is essential that you work out what the worst case scenario might be and whether you can afford it.

Although holiday rentals are usually much higher than those for normal properties, and increase even more during peak seasons, it is important to understand that you need to allow for longer vacancy periods and fluctuating occupancy levels from season to season. This coupled with high body corporate fees, management fees as well as maintenance and replacement costs means holding costs may be higher than you initially estimated. The annual maintenance and replacement costs for leisure properties, for example, is estimated to be in the region of four to five percent of the rental income, and the cost of property management usually comes in at around 15 percent of your rental income.

8. Holiday properties are volatile

It is important to always bear in mind that, at best, the values of properties in holiday locations tend to be volatile. Generally speaking, during recessionary times the leisure property markets tend to take the worst beating of all as holiday homes are high on the list of expendable assets. In South Africa, for example, even though residential house prices are gently on the rise, seaside homes seem to be bucking this trend. This is not surprising since the household sector remains cash-strapped and it is obvious that consumers will tend to focus more on essential primary residential buying.  As such, holiday properties tend to be lagging behind in the recovery.

This may be bad news for sellers, but good news for those in the market to buy a holiday home as there are currently many leisure properties on the market from which to choose.

9. Tax implications

Obviously, if you earn money through rentals on your holiday home you have to declare the income in your tax return.

While you should be able to claim deductions for the time that you rent out your leisure property, these must be proportioned according to the time it was rented out and the time used for your own personal use.

Also, since the holiday home will not be your main residence, you will have to pay capital gains tax when you sell it or transfer it into someone else’s name.

10. Insurance counts

Remember to factor insurance into the cost of owning a holiday home – you will require both home owners’ insurance, household insurance and, if you are going to rent it out, you will require public liability insurance as well. It is important that you take out public liability insurance to cover any possible claims from tenants or holidaymakers.

Accidental damage cover in your household policy is another option that can be considered – this will cover any accidental losses by tenants.

With the interest rate at an all time low, and the fact that there is a range of value-for-money leisure properties on the market, if you are an experienced investor looking to diversify your portfolio and lifestyle, investing in a leisure property is worth thinking about.

“There is no better time to invest than now as there are some real bargains to be found at the moment,” concludes Goslett.

11. Financing leisure property

Mortgage Plus works with all major lenders and private banks in South Africa, giving it the advantage of sourcing the best possible product for each customer.
Its vision for the future is to continue raising the innovation bar in financial industry as well as maintaining unwavering ethical behaviour, responsible business practices, and delivering a service which matches this ethos.

Remember by choosing us for a loan, you will get professional advice to make sure you are getting the best deal possible.

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za